Singapore: Bubble? What bubble?

On a recent trip to
Singapore, I was shocked to see that the 3 bedroom flat that I used to
rent with a few people in 2004 for SGP$2,100 was now renting for
SGP$4,300. Just over double in 3 years. Now what becomes even more
eye-opening is if you take the USD exchange rate fluctuations into
account, for those of us still clinging to greenback savings, the rise
is closer to 230%. Indeed, according to government statistics, the
prices are continuing to rise: in Q2, rents rose 10% and private-home
prices rose 8.3 percent, the fastest in 8 years. Now, that’s not so
bad when you consider Singapore’s GDP grew a healthy 7.9 percent last
year, but it is worrying nevertheless.

Last Friday, as
reported by Bloomberg, Jackson Tai, the CEO of DBS Group Holdings, said
that property prices are supported by strong economic growth with no
danger of a "bubble" developing. He continued to explain that about
90% of Singaporeans own their homes, compared to 65% in the US, which
had been hit by the subprime crisis, “The culture here of protecting
one's home is very different. We don't have the situation in the U.S.,
where the Federal Reserve creates or manufactures a housing bubble,
inducing people to refinance their homes” with “artificially low rates.”

Did you cringe a little on that last bit? I did.

Ok,
so yes, low rates do induce people to refinance their homes, but to
"manufacture a housing bubble" with “artificially low rates”? As I’m
sure Mr. Tai knows, interest rates are based on a basket of different
economic indicators and as most economies know (with the exception of
the EU some might argue), interest rates are not a one size fits all
solution. The “artificially low rates” weren’t artificially low at
all, they were what the US economy needed at the time. The core causes
of the subprime mess were borrower education, individual credit risk
decisions and how that risk was then bundled and sold off.

What
Tai should really be worried about is the very real issues that the
rising property prices are causing in Singapore. On one hand,
Singapore is becoming the private banking capital of Asia. Newly
minted university graduates with a talent for numbers and/or some
people skills are being paid upwards from US$100k/year base starting
salary for jobs in private banking. Great for the bankers like Tai,
who earned about US$5M in 2006; for them, a 200% rent increase isn’t an
issue. But for the rest of the foreigners in Singapore who are not
involved in banking, it’s a bit more difficult.

This disgruntled foreigner

Let’s
look at that a bit more. In mid-2005, 10% of the 4.3 million living in
Singapore were foreigners. In May of this year, out of the 4.4 million
Singapore residents, nearly 20% are foreign. Census data shows that
nearly 100,000 foreigners have come to Singapore every year, and indeed
they must: the birth-rate
in Singapore has declined by 30% since 2003. With a country that’s so
heavily reliant on human capital, maintaining the population is
critical and the government has been pushing increased immigration as a
solution.

This problem is that the cost of living is
starting to put off the kind of foreigners that they are trying to
attract. An informal survey of 30 of my well paid non-Singaporean
friends and associates living in Singapore showed that 100% were
dissatisfied with the rising costs. Many took jobs in Singapore years
ago because of some of the best pay in Asia and relatively low taxes,
however, these days, a lot of those gains are rapidly disappearing
because of the increased cost of housing and living in general*. Now,
a lot of the same foreigners who contributed to Singapore’s growth may
have to decamp to other locations where the economics makes more
sense**.

The disgruntled local

The average Singaporean is becoming less satisfied as well. According to a survey reported on by Time
magazine earlier this year, a January poll by a local newspaper found
that 90% of Singaporeans opposed the efforts by the government to
increase immigration because they fear losing their jobs to foreign
professionals. “43% said they believe the government is more concerned
about foreigners than its own people.; they also expressed doubt that
Singapore's open-door policy will translate into more jobs. ‘The
backlash comes from so-called foreign talents taking the best jobs
without any obligations to maintaining the national good,’ says
National University of Singapore sociology professor Chua Beng Huat.’”

So
it’s not a bubble yet, but if costs continue their upwards march, it
may be. With HK’s position as the destination of choice for
multi-nationals and foreign professionals diminished over the past few
years (not least due to pollution from mainland China), Singapore stock
has only increased. However, to keep that position, the government is
going to need to get involved soon to prevent undermining Singapore’s
growing stature in the region. Luckily for that small city-state, the
government is always willing to get involved.

* A survey by theonlinecitizen takes a rather humorous, yet sobering look at how prices have changed here. (For some reason couldn’t link to the original, so had to use a repost link)

** That's not even touching the fact that over 85%
of the foreigners working in Singapore are employed in low-paid jobs
such as construction workers or domestic maids. For them, it's even
more difficult.